1987 (6) TMI 71 - AT - Income Tax

Summary

Issues:
1. Refusal of registration to the assessee-firm under s. 184/185 of the IT Act.
2. Interpretation of partnership deed regarding profit and loss sharing.
3. Application of s. 13(b) of the Indian Partnership Act.
4. Consideration of rectification deed for sharing losses.
5. Ignoring documentary evidence by assessing authority.

Analysis:
1. The appeal was against the order of the ITO denying registration to the assessee-firm under s. 184/185 of the IT Act for the assessment year 1980-81. The partnership deed between two partners allocated profits at 75% and 25%, but was silent on loss sharing. The ITO held that as losses were not specified, registration was not granted.

2. The assessee contended before the AAC that partners must be deemed to share losses in the same ratio as profits under s. 13(b) of the Indian Partnership Act. However, the AAC upheld the ITO's decision based on the Mandyala Govindu & Co. case, rejecting the plea for presumed loss sharing.

3. The ITAT examined the matter and referred to the Supreme Court decision in Mandyala Govindu & Co. vs. CIT, emphasizing that in the absence of an agreement on loss sharing, partners are presumed to share losses in the same proportion as profits. The Tribunal found the AAC misapplied the law and held that partners should be liable to share losses in the profit-sharing ratio, granting registration to the assessee-firm.

4. Additionally, the Tribunal considered the rectification deed executed after the accounting period, clarifying the initial agreement on loss sharing. The authorities were criticized for ignoring this evidence and were directed to grant registration to the assessee firm based on the documentary proof.

5. The Tribunal allowed the appeal, setting aside the lower authorities' orders and instructing the ITO to register the assessee firm, emphasizing the importance of considering all relevant documents and applying the legal presumption of loss sharing in line with profit sharing ratios.